Deutsche's China ETF struggles to handle surging demand for A shares

Fund managers running the X-trackers Harvest CSI 300 China A-Shares ETF at a Deutsche Bank unit are facing a problem their rivals would love to have. They are luring too much money.

In five days last month, the US-based exchange-traded fund pulled in US$130 million, sending assets surging by 33 per cent to US$515 million and nearly exhausting its Chinese government-imposed A-share purchasing quota. Managers were forced to get creative. They limited new creations and borrowed quota from another fund to avoid closing the year-old ETF to inflows and keep a potentially disruptive premium to underlying assets from developing.

Their dilemma highlights what is likely to become an increasingly common predicament as fund providers from BlackRock to CSOP Asset Management look to follow suit and open up China's more than US$4 trillion A-share market to ETF investors in the United States.

"The A-share market has gotten a lot of attention," said Dodd Kittsley, the global head of ETF national accounts and strategy at Deutsche Bank's Deutsche Asset & Wealth Management unit. "We've been proactive in trying to create capacity without quota."

Surging demand has been fuelled in part by the biggest quarterly gain for mainland China stocks since 2009. The Shanghai Composite Index rallied 15 per cent in the three months to September 30.

To deal with the influx of new money, Deutsche Asset & Wealth Management last month said the ETF would accept just one creation unit per day. A unit represents 50,000 shares or about US$1.3 million at current valuation. This week it increased the cap to 10 creation units per day.